ROSS GARNAUT. Where Australia’s at 10 years after climate change review. (AFR 8.10.2018)

Energy costs will be lower if there is more investment in renewables capacity.

Ten years ago last week, I presented the Garnaut Climate Change Review to Australia’s prime minister, six premiers and two chief ministers. My main recommendations had the support of the federal leader of the opposition. Over the next few years, the states and territories agreed to fold their own myriad programmes on climate change and energy into a single national policy.

That is a long time and many climate and energy policies ago. Most recently, the National Energy Guarantee was designed to meet internal Coalition political constraints including the avoidance of open trade in emissions certificates, while promoting emissions reduction, reliability and lower prices for power. Emissions reductions, reliability and power prices are no less pressing after the official abandonment of the NEG. The good news is that developments in technology make it possible to meet the three objectives within policy frameworks that are still feasible in Australia.

Three huge developments since my 2008 report have transformed the technological and economic environment affecting emissions reduction, costs and reliability and security.

First, the emergence of a gas export industry in eastern Australia has affected costs of reliably supplying power. In 2008, gas generation was an important means of balancing fluctuating power demand with steady output from coal generators. It was expected to play a central role in balancing variations in supply from increasing proportions of intermittent renewables. Gas generators set the wholesale price whenever they are operating. Gas price increases – supported by increased demand for power from the LNG plants – have made major contributions to the doubling of wholesale prices since the commissioning of Gladstone exports.

Second, the costs of solar PV and wind power have fallen much more than was expected. My modelling a decade ago anticipated reductions of a few per cent per annum in the real costs of solar PV systems. Nominal costs have actually fallen by about five-sixths. Expansion of renewables generation places downward pressure on wholesale prices. The expansion of solar and wind output, encouraged by the Renewable Energy Target, is the main reason why average wholesale prices are lower this year than a year ago and are expected to fall over the next two years.

Third, there has been rapid improvement in quality and reduction in costs of technology for quickly balancing fluctuating power demand and supply. For some people in Australia, seeing is believing, and the Hornsdale battery in South Australia provides evidence. The new balancing technologies provide low cost alternatives to the security and reliability services once provided by gas and, working with renewables, reduce the amount of time expensive gas sets the price.

These three developments have transformed the trade-offs among reliability and security, costs, and emissions reductions. In my 2008 report, I spoke of the necessary energy transition coming at a substantial cost. Today, energy costs to the Australian economy as a whole will be lower if there is more investment in renewables capacity. This truth is revealed in realistically calibrated economic models of the energy sector.

Despite statements that it will be easy for Australia to reduce emissions by enough to contribute our fair share in a global effort, it will actually be hard. Economic analysis tells us that the lowest cost path to reducing overall emissions requires earlier and much bigger reductions in electricity than in other sectors. It is more costly to reduce emissions in industry and agriculture.

Crucial role of regulators

Does government policy matter for the electricity transition, if renewables are now cheaper?

The regulatory authorities have crucial roles in power security and reliability. Power security is now being provided through effective use of Australian Energy Market Operator’s powers, with full awareness of the new technologies.

Reliability involves the balancing of supply and demand at all times. The NEG approach had some merit. There is an opportunity now to assess whether some alternative approach, including through AEMO purchase of capacity services through a market, or from a Commonwealth authority (with Snowy 2.0 playing a role if it can provide services competitively). The wider Turnbull-Frydenberg legacy on pumped hydro storage will be helpful.

Is policy support needed for reducing emissions in the electricity sector? We will make progress simply because of the lower cost of renewables. Emissions will fall more rapidly, and make the necessary additional contribution to overall emissions reductions, with carefully calibrated support for new electricity generation. Faster renewables expansion will bring lower prices as well. In the new technological and economic circumstances, the support can be available for new generation generally. Market realities will do the rest.

Sound free market economics requires a carbon price when carbon emissions impose costs on the community. A traded carbon price – at best, economy-wide; or a new tranche of RET or a version of the NEG as third or fifth best – would bring emissions reduction at low cost. It is worth continuing discussion and analysis of these options, and supporting genuinely independent expert modelling and analysis of the effects on electricity prices.

Carbon pricing requires policy stability for good results. At best, it will be a considerable while before there is a basis for policy stability in community knowledge and support.

Contract-based schemes, such as the ACT, Victorian and Queensland power purchase agreements, and the Australian Competition and Consumer Commission’s Recommendation 4 on “price underwriting” are not as vulnerable to political risk. The ACCC proposal has additional advantages in increasing competition and requiring investment in firming as well as generation. It addresses the oligopoly problem in retail markets and the reliability issue at the same time as it encourages additional generation.

Coal interests see advantage in ACCC Recommendation 4, as it requires firming as well as generation. Combinations of renewables, storage and peaking can produce similar or superior security and reliability. I expect that the renewables-based options will deliver reliable power at lower cost. That expectation can be tested against coal-based options in the competitive market place.

The adoption of the ACCC’s Recommendation 4 would lead to lower wholesale prices and to smaller oligopoly gaps between prices in wholesale markets and paid by power users. It would lead to greater reliability. Whether it leads to lower emissions would emerge from market responses.

Ross Garnaut is a professorial research fellow in economics at the University of Melbourne and president of SIMEC ZEN Energy. He will be speaking at the AFR National Energy Summit in Sydney on Wednesday, October 10. To register visit www.nationalpolicyseries.com.au/afr-national-energy-summit.